Experts often tell you to buy as much car insurance as you can afford. That’s probably not helpful unless you know the basics on how auto insurance works — and which coverages you can’t skimp on.
Compare car insurance quotes only when you understand the coverages that are best for you. It might be helpful to use our auto insurance coverage calculator to see what other drivers like you — your age, in your state — choose, and what we recommend.
1) Some of the most helpful coverages are the cheapest.
The coverage you are required by law to buy — liability insurance — typically is the most expensive. It should be. The most common coverage limits can mean your insurance carrier is on the hook for hundreds of thousands of dollars for any damage you do.
Most other coverages are capped by the value of your car, though.
While collision, which pays to repair your car if you are at fault, can be pricey, other optional coverages such as gap coverage, roadside assistance, rental reimbursement, uninsured/underinsured motorist coverage and comprehensive coverage can provide a lot of protection for a little price increase.
Comprehensive coverage will normally be the most expensive of these other optional coverages. However, it’s usually about only half the price of collision coverage and a third the price of liability coverage. It’s worth the cost of comprehensive to cover your car for things such as theft, fire and vandalism.
Uninsured motorist coverage is especially important, considering the benefits it offers and the number of uninsured drivers on the road. Take a look at your coverage options. Paying a little more now may save you a lot in the future.
2) Factors that affect car insurance rate
Auto insurance companies use many different criteria when evaluating an insurance application during a process called underwriting. Each car insurance company has guidelines regarding which groups of drivers they want to accept and how much they will charge those groups they consider a greater risk. The guidelines are different for each company, meaning that two companies comparing the same driver can arrive at vastly different conclusions.
During the underwriting process, car insurance applicants are placed in a group based on how much money and how many claims the insurance company believes it may have to pay. Underwriting is done automatically by software behind the scenes.
At this time, the insurance company will look at motor vehicle records to see how many accidents or tickets a driver has received. Many insurance companies also use an insurance history report to see if the driver has made any car insurance claims, and how much money was paid. Although accidents and violations can only affect the rates you receive for three years, many companies will look back five or more years when deciding if they want to offer you insurance.
In addition, many auto insurance companies look at the credit history of the applicant. Typically, drivers with bad or no credit history pay more. But that means you can save money (quite a bit) by shopping around as your credit improves.
3) Insurance prices vary (a lot) by company.
Car insurance rates differ significantly from one insurance company to another. That’s because each insurance company uses its own formula to assess risk and decide what you pay for coverage. This means no two insurers will have identical prices for the same policy — often, the difference is hundreds of dollars. So, if you don’t compare rates, you can wind up overpaying.
“Auto insurance is a highly competitive business and one of the most effective ways to reduce insurance costs is simply to shop around,” according to Jeanne Salvatore, senior vice president of the Insurance Information Institute. “Drivers should look for an insurance company that will provide a good price along with excellent service.”
The best plan is to decide what coverages and options you need and comparison shop so you can find cheap auto insurance that still provides sufficient coverage.
4) If you let your policy lapse, you’ll pay more in the long run.
Most insurance companies view drivers who are licensed but don’t have insurance as risky or irresponsible. Because of this, if you let your policy lapse, you’ll probably pay more when you go to buy car insurance.
To avoid this, if you don’t want to pay for insurance or are planning to let your policy expire because you want to switch car insurance companies, make sure to purchase car insurance before your current policy is cancelled.
5) Higher deductibles can lower your premium.
Insurance prices are based on how much money the insurance company believes it could have to pay. If you agree to pay for a larger portion of your own damages by raising your deductibles, your car insurance company automatically knows they won’t have to pay as much for your claims.
Because of this, they will usually give you a lower premium. If you decide to raise your deductibles to save money, be sure you can afford to pay the deductible if you have to make a claim.
6) Insurance discounts can make a difference.
Most insurance companies offer auto insurance discounts for things like a safe driving record, car safety features, anti-theft devices, electronic payments and payment in full. Make sure you’re getting rewarded for being a safe driver and for having a safe car by shopping around for car insurance that appreciates your record.
7) Coverage affects what you pay.
The majority of your car insurance premium generally goes toward the policy’s legally-required liability portion. It’s typically not a good idea to reduce this portion to save money, because you’ll be responsible for any amount of damages above your policy limits.
However, other coverages, although generally helpful, could be reduced or eliminated to lower your premium. If you have an older car that’s not worth very much, or if you won’t have a problem paying for a new car, collision and comprehensive coverages may not make economic sense.
Use our coverage calculator to see how much car insurance coverage you need.
8) The car you drive can affect your auto insurance rates.
The Highway Loss Data Institute compiles insurance accident statistics for most types of cars. Many insurance companies use data like this when setting prices on your insurance.
For example, if the car you drive is expensive to repair, the company is going to have to pay more if you get in an accident. Conversely, if your car is extremely safe and protects occupants well, your insurance company won’t have to pay as much if you’re involved in a crash. If your model of car is generally less likely to be stolen, your car insurance company is less likely to have to pay to replace it.
All of these car-related factors can raise or lower the auto insurance quotes you receive, so it makes sense to keep insurance in mind when purchasing a car. Of course, since rates are based on much more than just the car you drive, your overall rate may be more or less than someone driving the same car.